McKinsey & Co. Discussion: 'Reverse The Curse'

McKinsey & Co. Discussion: 'Reverse The Curse'

McKinsey Global Institute (MGI), the economic research arm of McKinsey, has recently released a new report, entitled“Reverse the curse: Maximizing the potential of resource-driven economies.”The report, which involved a collaboration of more than 100 academics, 40 extractive companies, and 50 policymakers, looks at the changing resource landscape and the implications for resource-driven countries such as the Philippines.

The Asia Society is hosting an event on June 16, where the lead author of the report, Dr. Fraser Thompson, will discuss the research and the implications for extractive companies, government and civil society in the Philippines. This will be followed by a panel discussion with representatives from government and the extractive sector to discuss how to best work together so the Philippines can translate its sub-soil wealth into long-term prosperity.

Dr. Fraser Thompson is a senior fellow at the McKinsey Global Institute (MGI), McKinsey's business and economics research arm, based in London. His work focuses on sustainable development and natural resource economics globally, as well as productivity and growth issues in Europe, the Middle East, and Africa.

Fraser joined the Middle East office of McKinsey in 2006, before moving in 2008 to London, where he was an engagement manager. As a consultant, he served mainly public sector clients on productivity and economic growth issues, including developing a foreign direct investment strategy for a European country, creating low-carbon growth strategies for two Indonesian provinces, and developing economic competitiveness strategies for a Middle Eastern country and an African country.

About McKinsey Global Institute:

The McKinsey Global Institute (MGI), the business and economics research arm of McKinsey & Company, was established in 1990 to develop a deeper understanding of the evolving global economy. Our goal is to provide leaders in the commercial, public, and social sectors with facts and insights on which to base management and policy decisions.
MGI research combines the disciplines of economics and management, employing the analytical tools of economics with the insights of business leaders. Our “micro-to-macro” methodology examines microeconomic industry trends to better understand the broad macroeconomic forces affecting business strategy and public policy. MGI’s in-depth reports have covered more than 20 countries and 30 industries. Current research focuses on five themes: productivity and growth; the evolution of global financial markets; the economic impact of technology and innovation; urbanization and natural resources. Recent research covers job creation, infrastructure productivity, cities of the future, and a new wave of disruptive technologies.
Project teams are led by a group of senior fellows and include consultants from McKinsey’s offices around the world. These teams draw on McKinsey’s global network of partners and industry and management experts. In addition, leading economists, including Nobel laureates, act as research advisers. The partners of McKinsey & Company fund MGI’s research; it is not commissioned by any business, government, or other institution. For further information about MGI and to download reports, please visit www.mckinsey.com/mgi.

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Further details on the research can be found below:

Demand for minerals, oil, and gas has been sharply higher since 2000. While resource prices have softened recently, investment in minerals and oil and gas will need to increase significantly to 2030 in order to replace existing sources of supply coming to the end of their useful lives. This investment should promise huge benefits to countries with major reserves of natural resources, such as the Philippines. However, all too often, governments in these countries have failed to make the most of potential resource wealth.
This research by the MGI discusses the implications of these trends for different stakeholders, such as:

• Policymakers / donors / multi-laterals. There is a potential $1.8 to $3 trillion of cumulative resource investment available to 2030 in low and lower-middle income countries. To put this into context, on an annual basis, this is more than three times the 2011 development aid flows to these countries. The wise development and use of resource reserves could lift an additional 540 million people in resource-driven countries out of poverty by 2030. This is more than the number that China managed to shift out of poverty over the last 20 years. However historically resource-driven countries have failed to translate this sub-soil wealth into long-term prosperity. MGI’s research suggests six factors are crucial to get right and discusses lessons learnt from countries that have excelled in each area.

• Extractive companies. The value at risk for extractive companies is increasing, driven by a combination of volatility in resource prices; a shift in production toward lower-income, less-developed markets that are often environmentally challenging and geologically complex; and extractive projects representing a disproportionate share of these economies (so that extractive companies have a very visible role in the economies in which they operate and are subject to higher expectations on their contributions to local development). Managing this evolving and risky landscape requires extractive companies to shift from an “extraction mind set” to a “development mind set.” MGI has developed a new tool to assess the local development contributions of extractive companies and finds that many companies struggle with poor alignment of priorities with local stakeholders, a failure to communicate effectively the contributions they are making, and gaps in the rigor by which they determine the link of their development activities to business value.

• Investors. Even assuming a significant improvement in resource productivity, MGI estimates that up to $17 trillion will be needed to be invested by 2030 in oil and gas, and in minerals extraction to make this happen. This is more than double the historical investment over an equivalent period. Investors will need a more sophisticated understanding of how to mitigate the host of risks (from geological to political) associated with these investments.

• Equipment manufacturers. Between 40 and 80 percent of the revenues created in oil, gas, and mining is spent on the procurement of goods and services, exceeding the impact of tax and royalty payments in some cases. Increasing the proportion of goods and services that are procured locally (“local content”) is often a key goal for policy makers in resource-driven countries. In fact, we find that more than 90 percent of resource-driven countries have some form of local-content regulation in place, and mining is regulated as intensively in this regard as the oil and gas industry. Our research finds that four factors are important for companies to successfully navigate these complex local content requirements.

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